Friday, September 25, 2015

case you thought Berkshire Hathaway was
involved in only one bad deal—the $36 billion all-cash takeover of cyclical,
airline-supplying Precision Castparts for 20-times what may (or may not) turn
out to be peak-cycle earnings—well, there’s another deal Berkshire is involved
in, indirectly, that is not looking great for the acquiring company and its
shareholders: M&T Bank’s $5.4 billion all-stock acquisition of Hudson City
Bancorp.

Berkshire Hathaway has owned shares of M&T
for years, maybe decades, and for good reason: run by down-to-earth Bob
Wilmers, whose annual shareholder letter is required reading for anyone in this
business, M&T is one of the few banks with $50 billion or more in assets
that made it through the financial crisis without losing a dime, or needing a
bailout, or both, thanks entirely due to the sober culture of the place.

And while your editor owns M&T shares for
exactly the same reason as Berkshire Hathaway, the acquisition of Hudson City
is looking more like a pig in a poke than the tarnished gem it appeared to be
the day the deal was announced way back in August 2012.

The Feds, you see, have yet to approve the
deal, for reasons supposedly relating to concerns about M&T’s anti-money-laundering capabilities.And
while M&T has been spending heaps of money to fix whatever accounted for
the Fed’s concerns, the deal approval kept getting deferred.

Meantime, M&T’s stock—and the value of the
shares it agreed to pay for Hudson—kept climbing and now stands 30% above the initial
$7.56 value per Hudson share to $10.20 today.With 530 million Hudson shares outstanding, that means the initial $4 billion
price tag has jumped to over $5.3 billion.

Worse, given the long-deferred approval,
Hudson has been shrinking.Who, after
all, wants to work with a bank that may or may not be around—depending on the
Feds—in a year or two or three?And who
wants to work for that bank?

No surprise, then, that employment at Hudson
has shrunk from over 1,600 to 1,466 at last count, while the loan book has likewise
been shrinking—from $27 billion or so around the time of the announcement to
around $20 billion today.Deposits have also
skedaddled: there were $18 billion at last count, down from $23 billion back
when.

And despite the 30% jump in the value of the
transaction, shareholder equity has barely budged: $4.8 billion, up from $4.7
billion.So what M&T was once
paying below book value for it is now paying a pretty fancy multiple of book,
in bank terms.

Nevertheless, Wall Street’s Finest continue to
cheerlead the transaction.When Hudson
yesterday announced a $30 million settlement with the Feds (a different branch
of the Feds from the ones who will decide on the deal’s fate shortly) over
allegations of “redlining,” you would have thought Hudson had instead announced
that it had discovered that the company’s Paramus headquarters was sitting on a
giant shale gas field with a pipeline
already connected to Con Edison ready to supply New York City’s energy needs
for the next millennium: M&T’s stock popped and research reports
declared that this was just the sign we needed that the deal would shortly be
approved.

And maybe it will be.

But as an M&T shareholder, I’d just as
soon not be paying 30% more for so much less.

Jeff Matthews

Author
“Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

The content contained in this blog represents only
the opinions of Mr. Matthews. Mr.
Matthews also acts as an advisor and clients advised by Mr. Matthews may hold
either long or short positions in securities of various companies discussed in
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